Creditreform Bankrating

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1 Rating object Rating information Long Term Issuer Rating: BBB+ Short Term: L2 Outlook: Stable Creditreform ID: Incorporation: 1870 (Main-) Industry: Banks Management: John Cryan (CEO) Dr. Marcus Schenck (President) Christian Sewing (President) Rating of Bank Capital and Unsecured Debt Instruments: Senior Unsecured BBB+ Tier 2 BB Additional Tier 1 BB- Prepared on: 16 October 2017 Monitoring until: withdrawal of the rating Publication: 08 February 2018 Rating type: unsolicited Rating system(s): bank ratings; rating of bank capital and unsecured debt instruments Rating history: contents SWOT-Analysis... 1 Company Overview... 2 Business Development... 3 Performance... 3 Assets and Asset Quality... 4 Refinancing and Capital Adequacy.. 5 Liquidity... 6 Conclusion... 7 Ratings Detail... 8 SWOT-Analysis Strengths + Largest bank in Germany (total assets) with a strong position in Europe + One of the most systemically important banks in the world with considerable networking in the economy of Germany + Relatively few non-performing loans in peer group comparison + Low depreciation rates due to credit concentration in good cyclical countries, especially in Germany + Sufficient liquidity at any time in Balanced income structure between interest and commission income Weaknesses Analysts Tobias Stroetges Lead-Analyst Philipp J. Beckmann Co-Analyst / Senior Analyst - Unbalanced maturity transformation between short-term deposits and long-term liabilities leads to refinancing difficulties in case of customer deposits deduction and ECB policy shift - Bad performance at EBA stress test 2016 compared to the other European banks - Many legal disputes in recent years - Inadequate market capitalization in relation to the total assets Opportunities / Threats + Slightly positive development expected for Postbank has a good private customer base +/- One of the major European banks with a higher level of securities assets than customer loans or cash holdings - Stricter valuation of RWA s in the future Creditreform Rating AG October /11

2 Company Overview Deutsche Bank AG (Deutsche Bank) was founded in Measured by its total assets, it s the largest Privatbank in Germany (as of 2016). With 101,115 employees, (45,457 in Germany) Deutsche Bank is one of the largest employers in the financial sector of Germany. Deutsche Bank operates in more than 70 countries and is due to its worldwide network one of the most systemically important financial institutions in the world. The core business areas of the Deutsche Bank Group are Corporate & Investment Banking, Deutsche Asset Management, Global Markets, Private Wealth & Commercial Clients and Postbank AG as a separate Business Line (as of 2016). The operating income (total: 28.8 billion) of the individual segments is according to the financial statement of the year 2016: Illustration 1: Operating income by business lines On 28 th October 2009 Deutsche Bank took over Sal. Oppenheim, a private bank which had been independent for over 220 years. Through a takeover bid to the shareholders of Deutsche Postbank AG, Deutsche Bank took the majority of Postbank AG in The integration is still in process. Creditreform Rating AG October /11

3 Business Development Performance The operating income of Deutsche Bank amounted to 28.8bn last year and considerably decreased by 14% YOY (- 4,547m). Net interest income contributed with 51% the largest share to the operational income and significantly decreased by 7% YOY (- 1,174m). Fees and commissions contributed 41% and notably decreased by 8% YOY (- 1,021m). Of the three main drivers of operating income, net trading income contributed the smallest share with 3% and decreased by 79% YOY (- 2,734m). Operational expenses were about 27.7bn last year and significantly decreased by 15% YOY (- 4,758m). Personnel expenses accounted for 42.9% of total expenses last year and significantly decreased by 11% YOY (- 1,419m). Other expenses accounted for 27.6% of total expenses last year and substantially decreased by 32% YOY (- 3,631m). The Net Profit improved considerably over the previous year, however Deutsche Bank still posted a considerable loss of 1.4bn in Income Statement 2013 % 2014 % 2015 % 2016 % Income ( 000) Net Interest Income 14,834, % 14,272, % 15,881, % 14,707, % Net Fee & Commission Income 12,308, % 12,409, % 12,765, % 11,744, % Net Insurance Income -270, % -148, % -148, % -285, % Net Trading Income 3,333, % 3,239, % 3,478, % 744, % Equity Accounted Results 369, % 619, % 164, % 455, % Dividends from Equity Instruments 0 0.0% 0 0.0% 0 0.0% 0 0.0% Rental Revenue 23, % 57, % 40, % 31, % Lease and Rental Revenue NA 0.0% NA 0.0% NA 0.0% NA 0.0% Other Noninterest Income 919, % 1,261, % 1,194, % 1,431, % Operating Income 31,516, % 31,709, % 33,374, % 28,827, % Expenses ( 000) Depreciation and Amortisation 1,143, % 1,072, % 1,149, % 1,260, % Personnel Expense 12,329, % 12,512, % 13,293, % 11,874, % Occupancy & Equipment 2,073, % 1,978, % 1,944, % 1,972, % Marketing and Promotion Expense 294, % 293, % 294, % 285, % Other Provisions NA 0.0% NA 0.0% NA 0.0% NA 0.0% Other Expense 7,064, % 7,166, % 11,266, % 7,635, % Operating Expense 26,703, % 27,079, % 32,417, % 27,659, % Operating Profit & Impairment ( 000) Pre-impairment Operating Profit 4,813,000 4,630, ,000 1,168,000 Asset Writedowns 2,631,000 1,514,000 7,056,000 2,834,000 Net Income ( 000) Nonrecurring Revenue 0 NA NA 854,000 Nonrecurring Expense 725,000 NA NA 0 Pre-tax Profit 1,457,000 3,116,000-6,097, ,000 Income Tax Expense 775, % 1,425, % 675, % 546, % Discontinued Operations Net Profit 681,000 1,691,000-6,772,000-1,356,000 Figure 1: Group income statement The Cost Income Ratio of the bank was significantly worse than that of its peers and showed a decrease of 1.18 percentage points over the previous year. In the reporting year, the same figure increased for the peer group. The Cost Income Ratio ex trading of Deutsche Bank was considerably worse than that of its peers and showed a sizeable decrease of 9.94 percentage points over the previous year. The decrease for peer banks was less pronounced. Especially the ROAA, ROAE and RoRWA reflect the problematic situation of the Deutsche Bank due to the net loss. The previous year s values for these three figures are also below average in the peer group comparison. The net interest margin of the bank was remarkably worse than that of its peers and showed a decrease of Creditreform Rating AG October /11

4 0.05 percentage points over the previous year. The deterioration for peer banks was less pronounced. The earnings figures were weakest compared to the other examined business development parts. Income Ratios (%) 2013 % 2014 % 2015 % 2016 % Return on Average Assets (ROAA) 0.04 NA Return on Equity (ROAE) 1.21 NA RoRWA 0.22 NA Net Interest Margin 0.88 NA Cost income Ratio ex. Trading NA Cost income Ratio NA Change in %-Points Figure 2: Group key earnings figures Assets and Asset Quality In terms of total assets, financial assets made up 91% and fell by 3% YOY (- 46bn). Net loans to customers were responsible for 25% of the financial assets and considerably decreased by 6% YOY (- 25bn). Total securities contributed the largest share with 52% of the total assets and considerably declined by 11% YOY (- 103bn). Of the three main constituents of the asset side, cash positions made up the smallest share with 13% and significantly increased by 66% YOY (+ 82bn). In times of negative interest rates this illustrates the difficulties of Deutsche Bank in the search for profitable business segments. Total assets of Deutsche Bank measured 1,591bn and lowered by 2% YOY (- 39bn). Assets ( 000) 2013 % 2014 % 2015 % 2016 % Cash and Cash Equivalents 118,579, % 106,631, % 123,965, % 206,246, % Net Loans to Customers 353,142, % 382,553, % 413,565, % 395,633, % Total Securities 964,243, % 1,020,363, % 922,603, % 819,640, % Financial Assets 1,471,500,000 91% 1,544,438,000 90% 1,491,146,000 92% 1,444,978,000 91% Equity Accounted Investments 3,581, % 4,143, % 1,013, % 1,027, % Other Investments 0 0.0% 0 0.0% 0 0.0% 0 0.0% Insurance Assets NA 0.0% NA 0.0% NA 0.0% NA 0.0% Noncurrent Assets HFS & Discontinued Ops 6,670, % 180, % 3,491, % 563, % Tangible and Intangible Assets 18,352, % 17,860, % 12,924, % 11,786, % Tax Assets 9,393, % 8,684, % 9,047, % 10,225, % Total Other Assets 101,906, % 133,397, % 111,510, % 121,966, % Total Assets 1,611,400, % 1,708,703, % 1,629,130, % 1,590,546, % Figure 3: Development of assets By contrast the NPL ratio of the bank was significantly lower than that of its peers and showed a decrease of 0.1 percentage points over the previous year. The decline for peer banks was more pronounced, however. The NPL / RWA ratio of the bank was vastly better than that of its peers and showed an increase of 0.05 percentage points over the previous year. The same figure decreased for the peer group. The potential problem loans / NPL ratio was immensely better than that of its peers and showed a minor increase of 0.15 percentage points over the previous year. Peer banks noticed a more distinct increase. The Reserved /Impaired Loans ratio of the bank was significantly worse than that of its peers and displayed a decrease of 0.64 percentage points over the previous year. However, the same ratio increased for the peer group. By contrast the Net Write-offs / average RWA ratio of the bank was considerably better that of its peers and showed a large, relative increase of 0.19 percentage points over the previous year. The same ratio decreased for the peer group. The RWA / assets figure of the bank was better than that of its peers despite a significant decrease of two percentage points over the previous year. The decrease for peer banks was less pronounced. Generally speaking, Deutsche Creditreform Rating AG October /11

5 Bank has a diversified and good asset quality. Of the four examined business development parts, the asset quality figures achieved the highest relative score. Asset-Quality (%) 2013 % 2014 % 2015 % 2016 % Non Performing Loans (NPL) / Loans 3.48 NA NPL / RWA 4.10 NA Potential Problem Loans / NPL NA Reserved / Impaired Loans NA Net Write-offs / Risk-adjusted Assets 0.33 NA Risk-weighted Assets/ Assets NA Change in %-Points Figure 4: Development of asset quality Refinancing and Capital Adequacy Financial liabilities of Deutsche Bank represented 89% of the total liabilities and remained at a constant level during the previous years. Customer deposits contributed for 28% of the total liabilities and declined by 3% YOY (- 14bn). For the most part, deposits from customers are short term (more than half of the deposits are overnight). The deposits are developing relatively steady, compared to the loans. Total debt represented 22% of total liabilities and increased markedly by 13% YOY (+ 39bn). Total equity represented the smallest share with 4.1% of total assets and fell by 4% YOY (- 3bn). Liabilities ( 000) 2013 % 2014 % 2015 % 2016 % Total Deposits from Banks 114,176, % 108,350, % 119,065, % 116,094, % Total Deposits from Customers 413,574, % 424,584, % 447,909, % 434,110, % Total Debt 358,588, % 263,406, % 299,871, % 338,825, % Derivative Liabilities 484,044, % 615,265, % 500,441, % 468,451, % Securities Sold, not yet Purchased NA 0.0% NA 0.0% NA 0.0% NA 0.0% Other Financial Liabilities 7,780, % 27,136, % 5,402, % 4,019, % Total Financial Liabilities 1,378,162,000 89% 1,438,737,000 88% 1,372,690,000 88% 1,361,498,000 89% Insurance Liabilities NA 0.0% NA 0.0% NA 0.0% NA 0.0% Unit-Linked Insurance and Investment Contr. 8,067, % 8,523, % 8,522, % 592, % Tax Liabilities 2,701, % 2,783, % 2,445, % 1,815, % Noncurrent Asset Retirement Obligations NA 0.0% NA 0.0% NA 0.0% NA 0.0% Other Provisions 4,524, % 6,677, % 9,207, % 10,973, % Total Other Liabilities 156,715, % 178,760, % 168,603, % 150,146, % Total Liabilities 1,556,434, % 1,635,481, % 1,561,506, % 1,525,727, % Total Equity 54,966, % 73,223, % 67,624, % 64,819, % Total Passiva 1,611,400, % 1,708,703, % 1,629,130, % 1,590,546, % Deposits from Customers Growth* NA Change in %-Points Figure 5: Development of refinancing and capital adequacy The decline in equity did not lead to any deterioration in the capital ratios (see figure 6), because the RWA s were disproportionately reduced within one year. Just the equity ratio of Deutsche Bank was significantly worse than that of its peers and showed a decrease of 0.08 percentage points over the previous year. The decrease for peer banks was less distinct. The CET1 Ratio of the bank was comparable to that of its peers and showed an increase of 0.22 percentage points over the previous year. The increase for peer banks was less pronounced. The Tier 1 ratio of the bank was comparable to that of its peers and showed a significant increase of 0.92 percentage points over the previous year. The increase for peer banks was less striking. The total capital ratio was comparable to that of its peers and showed a considerable increase of 1.21 percentage points over the previous year. Peer banks observed a lesser increase. The leverage ratio of Deutsche Bank Creditreform Rating AG October /11

6 was significantly worse than that of its peers and remained unchanged at 3.5% over the previous three years. The decrease for peer banks was less pronounced. Capital ( 000) 2013 % 2014 % 2015 % 2016 % Total Capital 55,464,000 NA 68,293, ,522, ,158, Total Risk-weighted Assets 300,369,000 NA 396,648, ,382, ,235, Capital Ratios (%) Core Tier 1 Ratio NA Tier 1 Ratio NA Total Capital Ratio NA Leverage Ratio 2.40 NA Fully Loaded: Common Equity Tier 1 Ratio NA Fully Loaded: Tier 1 Ratio NA Fully Loaded: Risk-weighted Capital Ratio NA Total Equity/ Total Assets 3.41 NA Change in %-Points Figure 6: Development of capital ratios Liquidity The liquidity situation of Deutsche Bank was apt at any given time in The loan to deposit ratio of the bank was significantly less than that of its peers and displayed a decrease of 1.2 percentage points over the previous year. At the same time, the decline for peer banks was more pronounced. The interbank ratio was much lower that of its peers and showed a decrease of 0.48 percentage points over the previous year. This value is an indicator of the continued confidence of other banks in the solvency of Deutsche Bank. The LTD ratio, on the other hand, is more balanced than the interbank ratio. The liquidity coverage ratio was significantly worse than that of its peers and displayed a considerable increase of 7.96 percentage points over the previous year. With regard to the maturity structure between customer deposits and customer liabilities, it should be noted that 90% of the deposits have a maturity of <3 months, the liabilities exceed 70% > 1 year. As a result, Deutsche Bank should be wary of short term refinancing difficulties. Liquidity (%) 2013 % 2014 % 2015 % 2016 % Liquidity Coverage Ratio NA NA NA Interbank Ratio NA Loan to Deposit (LTD) NA Change in %-Points Figure 7: Development of liquidity Creditreform Rating AG October /11

7 Conclusion Deutsche Bank has a number of tasks and challenges to deal with in the near future. On the one hand, there are many internal restructuring tasks, such as a sensible integration of the Postbank AG. On the other hand, the external problems are in form of legal disputes and the resulting negative image. Deutsche Bank s ambivalent/negative image has already led to the loss of customer deposits and declining new business. Therefore, the restructuring of the bank has to improve the image of the bank, so that the market position can be further expanded. Additionally, the digitalization of the banking business must make cost savings possible in the future, so that the profit situation can be sustainably improved. In contrast to the development of income, the asset quality has improved in the recent years and ranks highly in the peer group comparison. As a result of the capital increase (+ 8bn) in 2017, the capital ratios are much higher than The new ratios are above the peer group average. The improved equity situation will likely lead to a better performance in future EBA stress tests. The liquidity situation was satisfactory at any given time in The current half-year figures for 2017 show a profit recovery, especially due to cost reduction. The asset quality remains high and the RWA s could be reduced slightly. Due to the equity increase, the capital ratios are now satisfactory. The bank s efforts to make a turnaround are already positive in key figures. As part of a scenario analysis, the "Best Case" would result in a substantial improvement in the rating. In the "Worst Case" scenario the result would be significantly lower. Creditreform Rating AG October /11

8 Ratings Detail Bank ratings The bank ratings are dependent on a host of quantitative and qualitative factors. An improvement in either sub-category may result in a higher rating score. LT Issuer / Short-Term / Outlook BBB+ / L2 / Stable Bank Capital and Debt Instruments Ratings The ratings for bank capital and debt instruments are inter alia dependent on subordination and relative size of the instrument class, based on the long-term issuer rating of the bank. preferred senior unsecured debt: Tier 2 (T2): Tier 1 (AT1): BBB+ BB BB- Ratings Detail and History Ratings Bank Capital and Debt Instruments preferred senior unsecured 01 February 2018 BBB+ Tier 2 01 February 2018 BB Tier 1 01 February 2018 BB- Bank Issuer Rating History LT Issuer / Short-Term / Outlook 16 October 2017 BBB+ / L2 / Stable Figure 8: Ratings Creditreform Rating AG October /11

9 Regulatory Creditreform Rating AG was neither commissioned by the rating object nor by any other third parties for the rating. The analysis took place on a voluntary basis by Creditreform Rating AG and is to be described in the regulatory sense as an unsolicited rating. The rating is based on publicly available information and internal evaluation methods for the rated bank. The quantitative analysis is based mainly on the latest annual accounts, interim reports, other investor relations information of the bank, and calculated key figures by S&P Global Market Intelligence subject to a peer group analysis were 41 competing institutes. The information and documents processed satisfied the requirements according to the rating system of Creditreform Rating AG published on the website The rating was carried out on the basis of the rating methodology for unsolicited bank ratings as well as the methodology for the rating of bank capital and unsecured debt instruments. On 01 February 2018, the rating was presented by the analysts to the rating committee and adopted in a resolution. The rating result was communicated to and the preliminary rating report was made available to it. There was no change in the rating score. The rating is subject to one-year monitoring from the creation date (see cover sheet). Within this period, the rating can be updated. At the latest after one year, a follow-up is required to maintain the validity of the rating. In 2011 Creditreform Rating AG was registered within the European Union according to EU Regulation 1060/2009 (CRA-Regulation). Based on the registration Creditreform Rating AG (CRAG) is allowed to issue credit ratings within the EU and is bound to comply with the provisions of the CRA-Regulation. Conflict of Interests No conflicts of interest were identified during the rating process that might influence the analyses and judgements of the rating analysts involved or any other natural person whose services are placed at the disposal or under the control of Creditreform Rating AG and who are directly involved in credit rating activities or approving credit ratings and rating outlooks. In case of providing ancillary services to the rated entity, CRA will disclose all ancillary services in the credit rating report. Rules on the Presentation of Credit Ratings and Rating Outlooks The approval of credit ratings and rating outlooks follows our internal policies and procedures. In line with our policy Rating Committee, all credit ratings and rating outlooks are approved by a rating committee based on the principle of unanimity. To prepare this credit rating, CRA has used following substantially material sources: 1. External service provider for aggregated data base 2. Website of the rated bank 3. Annual report Creditreform Rating AG October /11

10 4. Abridged version of the annual report There are no other attributes and limitations of the credit rating or rating outlook other than displayed on the CRA website. Furthermore CRA considers satisfactory the quality and extent of information available on the rated entity. In regard to the rated entity Creditreform Rating AG regarded available historical data as sufficient. Between the disclosure of the credit rating to the rated entity and the public disclosure no amendments were made to the credit rating. The Basic data information card indicates the principal methodology or version of methodology that was used in determining the rating, with a reference to its comprehensive description. In case where the credit rating is based on more than one methodology or where reference only to the principal methodology might cause investors to overlook other important aspects of the credit rating, including any significant adjustments and deviations, Creditreform Rating AG explains this fact in the credit rating and indicates how the different methodologies or these other aspects are taken into account in the credit rating. This information is integrated in the credit rating report. The meaning of each rating category, the definition of default or recovery and any appropriate risk warning, including a sensitivity analysis of the relevant key rating assumptions, such as mathematical or correlation assumptions, accompanied by worst-case scenario credit ratings as well as best-case scenario credit ratings are explained. The date at which the credit rating was released for distribution for the first time and when it was last updated including any rating outlooks is indicated clearly and prominently in the Basic data card as a Rating action ; first release is indicated as initial rating, other updates are indicated as an update, upgrade or downgrade, not rated, confirmed, selective default or default. In the case of a rating outlook, the time horizon is provided during which a change in the credit rating is expected. This information is available within Basic data information card. In accordance to Article 11 (2) EU-Regulation (EC) No 1060/2009 registered or certified credit rating agency shall make available in a central repository established by ESMA information on its historical performance data, including the ratings transition frequency, and information about credit ratings issued in the past and on their changes. Requested data are available at the ESMA website: An explanatory statement of the meaning of Creditreform`s default rates are available in the credit rating methodologies disclosed on the website. Creditreform Rating AG October /11

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